Australian solar installers are racing to become the first companies to offer long-term leasing arrangements that will allow householders to install large rooftop solar installations at zero up-front cost and hedge against rising electricity prices.
The move is being hailed as a potential game changer in the industry, whose growth has been arrested by sudden changes to feed-in-tariffs, but it could also have a big impact on established energy utilities, both generators and retailers, and has the potential of changing the political rhetoric as the next federal poll is fought on cost-of-living issues, mostly retail electricity prices.
Solar industry insiders say that the plunging cost of solar, which has fallen as much as 70 per cent by some estimates, is now presenting the opportunity for 20-25 year leasing deals for rooftop solar systems that require no money down and can act as a hedge against electricity costs, which are rising sharply, mostly because of grid infrastructure investment.
Jeremy Rich, the managing director of Energy Matters, a leading solar installer, said his company is working on a leasing product that it plans to launch soon. It expects to be quickly followed by others. These leases will likely be financed by private equity and high net worth individuals, and if successful is likely to be taken up by banks who could offer even more attractive rates.
“This could be a game changer for the industry,” Rich says. “You will have a product that shows savings from day one, there is no deposit down, you don’t have to redraw on the home loan.” It will also replace shorter-term repayment plans that have already been used.
Rich says that the most cost-efficient method for a household would be to redraw on mortgages – as pointed out by Ray Wills, the head of the Sustainable Energy Association of Australia, last year. However, Rich said leases offer simplicity and can be accessed by more people. They will be able to be structured in a variety of ways to offer more savings now, or into the future, as electricity costs rise further. And because the solar company is guaranteeing a service, it has to ensure the quality of the solar product.
Essentially, it is a similar model to that used by mobile phones, except that the leasing costs will be cheaper than what people would normally pay for electricity, so there is a demonstrated saving. The electric vehicle battery leasing model proposed by the likes of Better Place is based on a similar concept.
And it has been shown to work. In the US, leasing has taken off in the last two years, and nearly 75 per cent of rooftop solar installations in California are now based on leases with zero up-front costs, and the market is expanding fast.
One of the biggest players is SolarCity, which plans an IPO later this year that is expected to raise $1.5 billion. Google last year provided $280 million for its financing activities, while Bank of America provided it with $1 billion. Another major player, SunRun, sells 90 per cent of its products through leases.
“I would think that in times like now, when people are short of disposal income, and cost of living is going through the roof, any relief that consumers can get is going to be well received,” Rich says. Other products that will allow landholders and tenants to share the savings of rooftop solar are also believed to be coming to the market anytime soon, further expanding the percentage of the population that can benefit from rooftop PV.
But this has wider implications. A new surge in the deployment of rooftop solar in Australia could have an impact on generators, who are already worried about the impact it is having on their profits. As we highlighted in this story here, the impact on generator earnings in country with a large penetration of solar, such as Germany and Italy, is already dramatic, and AGL highlighted the potential for this to happen in Australia, which is why it is lobbying to slow down the growth in the solar industry in Queensland, the last state to have a significant feed in tariff.
And it will have implications for the energy retailers, because it marks the first concrete signs that the delivery of electricity to households is moving to a service-based industry, rather than commodity-based simply around the sale of electrons.
This trend is expected to accelerate in coming years with the rollout of electric vehicles and smart appliances, which mean that householders will be able to evolve from mere consumers to “prosumers,” who can generate their own electricity, store it, and control the quantity and time of their use.
Such a move poses huge challenges on the electricity retailers’ current business model and, as pointed out by numerous global surveys, it is not entirely clear that they are ready to adapt. Adding to the complication in Australia is the fact that our biggest utilities are “vertically integrated” and are generators as well as retailers. Not only do they face a double whammy effect, but any initiatives in one part of the business to address the issue could cause problems in the other part of the business. Network operators are at risk too of having stranded assets.
But another intriguing aspect is the potential of “zero-cost” solar to change the political rhetoric around energy costs and clean energy, which – in the lead-up to the next federal poll – is likely to be fought, for a large part, on electricity prices. Data already shows that solar PV has been most popular in the mortgage belt, but the availability of leases to households up and down the income chain kills the argument that solar PV is a form of middle class welfare.
Federal Labor is in desperate need for a new narrative. Simply saying that cost of living will be worse under Abbott is not sufficient: Labor needs to demonstrate that things can be better under Labor and the Clean Energy Future package, and this could be their opportunity, if they know how to seize it. The Clean Energy Future can indeed be clean, exciting (new technology), and cost a lot less than sticking with polluting fossil fuels.
The ALP can even claim that it is Labor policies that have helped bring this to reality: the renewable energy target, the solar multiplier, and the state-based feed-in tariffs (all introduced by Labor governments) have been the architects of the solar boom (even if some were so badly managed they cost more than they needed to and caused collateral damage to the wind industry). It should be remembered that the plunging cost of solar PV is only partially due to the dramatic slump in module prices for China. More than half the cost comes from “balance-of-system” costs such as installation, maintenance and finance, which are local issues that are reduced with greater deployment.
And they can argue that it is the conservative governments who have been winding back the tariffs at the behest of the vested interests in the energy industry, as revealed last week by AGL Energy, who boasted that it was mostly responsible for the decapitation of the state-based tariffs for fear its earnings would be adversely affected.
The arrival of zero-cost solar and a natural hedge against rising electricity prices fits in with the narrative of the International Energy Agency and most independent global assessment that clean energy will ultimate deliver cheaper energy. It’s just that no one expected it to come quite so quickly, and many still do not appreciate just how quickly costs are falling.
As David Crane, the head of the leading US utility NRG explained last week, the cost fall in solar PV is taking the global energy industry by surprise, and is the biggest game changer he has seen in his three decades in the industry. “One of the things I tell business is that if you evaluated rooftop solar a year ago, you are way out of date. If you did it three months ago, you are way out of date. Unless you can tell me you did it yesterday you should be re-running your numbers. The price has come down that far.”
The Australian government could facilitate the rollout by introducing a national feed-in tariff. As Rich points out, the fact that retailers in some states have no obligation now to pay for electricity exported from rooftop systems to the grid reduces the potential savings in a lease. A national FiT does not need to be very high or costly, it just needs to be consistent.
Sadly, the Australian government seems to working through a fog of misinformation, and Gillard’s office might send a few advisors over to Energy Minister Martin Ferguson’s office, to find out why they are so out of touch with the market.
The Draft Energy White Paper, released late last year, virtually ignores solar, mostly because it relies on advice from “independent” consultants, whose predictions for reductions in the cost of solar PV in 2035 are so laughably wrong that their forecasts are actually higher than the current cost in 2012.
This graph below highlights the problem. It was prepared by ACIL Tasman, one of the expert consultants on whom the energy department relies, on behalf of gas client, Santos. It predicts the energy mix out to 2035. Solar doesn’t exist.
NEM electricity generation output by fuel type